SOURCES OF FINANCE: AN ANALYSIS

This Final draft is submitted in partial fulfillment of the project in “Financial

Management” for the requirement of the degree of B.B.A. L.L.B(Hons.)

Submitted to: Submitted by:

Mr. Ashok Sharma ASHUTOSH RANJAN

Assistant Professor of Management Roll No. - 2812

B.B.A. LL.B.(Hons.)

Semester – 2nd

Chanakya National Law University, Patna

January, 2023

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 TABLE OF CONTENTS

Contents
ACKNOWLEDGEMENT ......................................................................................................................................... 3
DECLARATION ...................................................................................................................................................... 4
1.1 Introduction ................................................................................................................................................... 5
1.1.1. Review of Literature .............................................................................................................................. 9
1.2 Present Study:- ............................................................................................................................................ 10
1.2.1. Research Objectives ............................................................................................................................ 10
1.2.2. Research Questions ............................................................................................................................. 10
1.3 Hypothesis ............................................................................................................................................... 10
1.4 Research Methodology............................................................................................................................ 10
1.5 Scope & Limitation of Study ................................................................................................................... 11
Bibliography:- .................................................................................................................................................... 12

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 ACKNOWLEDGEMENT

I would like to express my profound gratitude and deep regards to my guide, Mr. Ashok
Sharma, Assistant Professor of Management, for assigning me the topic I was most
interested in. It was under his guidance that I structured my project and built on my abilities to
research on the subject.

I owe the present accomplishment of my project to everyone, who helped me immensely with
materials throughout the project and without whom I couldn’t have completed it in the present
way.

I would also like to extend my gratitude to my friends, family members and all those unseen hands
that helped me out at every stage of my project either financially, intellectually or emotionally.

Thank You,
Ashutosh Ranjan
Semester- 2nd
CNLU, Patna

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 DECLARATION

I hereby declare that the work reported in the B.B.A. L.L.B.(Hons.) project report entitled
"Sources of Finance: An analysis " submitted at Chanakya National Law
University,
Patna is an authentic record of my work carried out under the supervision of Mr. Ashok
Kumar. I have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my project report.

(Signature of the candidate)

Ashutosh Ranjan (2812)

B.B.A. LL.B.(Hons.)
2nd Semester
Chanakya National Law University, Patna

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1.1 Introduction

The source of finance is a provision of finance for a business to fulfil its operational
requirements. This includes short-term working capital, fixed assets, and other
investments in the long term. There are two sources of finance: internal and external. Internal
sources of finance come from inside the business, meanwhile, external sources of
finance come from outside the business. Finance is said to be the “vital blood” of any
organisation this is especially true for a business organisation.
There can be different sources of finance for an organisation depending on the needs and
requirements of the organisation as well as the availability of sources of finance.

Different Sources of Finance

1. Retained Earnings:
Most of the time, a business does not distribute all of its profits to its shareholders in the form
of dividends. A portion of the net income may be kept by the business for use in the future.
These are referred to as retained earnings. It serves as a means of internal funding, self-
financing, or profit-sharing. The amount of profit that can be reinvested in a company
depends on a number of variables, including net profits, the dividend policy, and the
company's age.
2. Trade Credit:
Trade credit is credit given by one trader to another for the purchase of products and services. Trade
credit facilitates the purchase of goods without the need for immediate payment. Such credit shows
in the buyer of goods’ records as ‘sundry creditors’ or ‘accounts payable.’ Business organisations
frequently utilise trade credit as a form of short-term finance. It is granted to consumers that have a
solid financial status and a good reputation. The amount and period of credit provided are determined
by criteria, such as the purchasing firm’s reputation, the seller’s financial status, the number of
purchases, the seller’s payment history, and the market’s level of competition. Trade credit terms
might differ from one industry to another and from one person to another.

3. Factoring:
Factoring is a financial service in which the ‘factor’ provides a variety of services such as :

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 • Bill discounting (with or without recourse) and debt collection for the client: Under this,
receivables from the sale of goods or services are sold to the factor at a certain discount. The
factor takes over all credit control and debt collection from the buyer and protects the
company against any bad debt losses.
Factoring has basic two methods: Recourse and Non-recourse.
The customer is not safeguarded against the risk of bad debts while using recourse factoring.
Non-recourse factoring, on the other hand, involves the factor assuming the complete credit
risk, which means that the full amount of the invoice is reimbursed to the client if the debt
goes bad

• Factors retain vast volumes of information on the trading history of businesses, which they
use to provide information about the creditworthiness of prospective clients, among other
things. This can be beneficial to individuals that use factoring services, and therefore avoid
doing business with consumers who have a bad payment history. Factors may also provide
appropriate consulting services in areas, like finance, marketing, and so forth.

4. Public Deposits:
Public deposits are deposits gathered from the public by organisations. Interest rates on public
deposits are often higher than those on bank deposits. Anyone who wants to make a monetary
contribution to an organisation can do so by filling a specified form.

In return, the organisation gives a deposit receipt as proof of payment. A business’s medium and
short-term financial needs can be met through public deposits. Deposits are beneficial to both the
depositor and the organisation. While depositors receive higher interest rates than banks, the cost of
deposits to the corporation is lower than the cost of borrowing from banks. Companies often seek
public deposits for up to three years. The Reserve Bank of India regulates the acceptance of public
deposits.

5. Commercial Papers:
Commercial Paper (CP) is an unsecured promissory note. It was first created in India in 1990 to
allow highly rated corporate borrowers to diversify their sources of short-term borrowings and to
give investors an additional instrument.

Following that, primary dealers and all-India financial institutions were authorised to issue CP in
order to cover their short-term funding needs for their operations. Individuals, banks, other corporate
organisations (registered or incorporated in India), unincorporated bodies, Non-Resident Indians

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(NRIs), and Foreign Institutional Investors (FIIs), among others, can invest in CPs. CP can be issued
in denominations of Rs.5 lakh or multiples thereof with maturities varying from 7 days to up to one
year from the date of issue.

6. Issue of Shares:
A share is the smallest unit of a company’s capital. The firm’s capital is split into small units and
issued to the public as shares. The capital gained via the issuance of shares is referred to as ‘Share
Capital.’ It’s a kind of Owner’s Fund.

There are two kinds of shares that can be issued:

• Equity Shares: These are shares that do not pay a fixed dividend, but do have
ownership and voting rights. Owner of the firm refers to the company’s equity
shareholders. They do not get a set dividend, but are paid dependent on the company’s
profitability.
• Preference Shares: Preference shares are shares that have a slight preference over
equity shares. Preference Shareholders get a set dividend rate and have the right to receive
their capital before equity shareholders in case of liquidation. They do not, however, have
any voting rights in the company’s management.

7. Debentures:
Debentures are an effective instrument for raising long-term debt capital. A firm can raise capital
by issuing debentures with a fixed rate of interest. A firm’s debenture is a recognition that the
company has borrowed a specified amount of money, which it commits to repay at a later period.
Debenture holders are part of the company as the company’s creditors. Debenture holders get a
definite stated amount of interest at predetermined periods, such as six months or a year.

Debentures issued publicly must be assessed by a credit rating agency such as CRISIL (Credit
Rating and Information Services of India Ltd.) on factors such as the company’s track record,
profitability, debt payment capability, creditworthiness, and perceived risk of lending.

8. Commercial Banks:
Commercial banks play an important role in providing finances for a variety of purposes
and time periods. Banks provide loans to businesses in a variety of ways, including cash
credits, overdrafts, term loans, bill discounting and the issuance of letters of credit. The

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interest rate imposed on such credits varies depending on the bank as well as the nature,
amount, and duration of the loan.

9. Financial Institutions:
The government has established many financial institutions in the country to give financing
to businesses. They provide both owned and loan capital for long- and medium-term needs.
These organisations are often known as ‘Development Banks’ since they aim to promote a
country’s industrial development. In addition to financial help, these institutes conduct
surveys and provide organisations with technical assistance and management services.
Financial institutions provide funds for the expansion, reorganisation and modernisation of
an enterprise.
10. Lease Financing
A lease is a contractually enforceable arrangement whereby a one party, the owner of an
asset, grants the other party the right to use the asset in exchange for a monthly payment.
In other terms, it is the rental of an asset for a certain amount of time. The party who owns
the assets is known as the ‘lessor,’ while the party who utilises the assets is known as the
‘lessee.’ The lessee pays the lessor a predetermined periodic sum known as lease rental in
exchange for the usage of the asset.

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1.1.1. Review of Literature

1. Shivam Pradhan, ‘What are the different sources of finance’, geeksforgeeks.org,

(November 23, 2022 ),
https://www.geeksforgeeks.org/what-are-the-different-sources-of-finance/
This article explains what are sources of finance and different types of sources of
finance and their explanation.

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1.2 Present Study:-
1.2.1. Research Objectives

1.) To understand the meaning of sources of finance and its different impacts on an
organisation.
2.) To study the different sources of finance with the view of understanding it’s impact on an
organisations success and failure.
3.) To do a comparison between the risk and rewards of different sources of finance.

1.2.2. Research Questions

1.) What is the importance of sources of finance for an organisation?

2.) How different sources of finance affect the business organisation in different
manner?
3.) How should sources of finance be chosen for an organisation in order to bring
maximum profitability and minimum risk?

1.3 Hypothesis

In this project report, the researcher presumes that sources of finance are a determining factor
in an organisations success or failure.

1.4 Research Methodology

The researcher has adopted a purely doctrinal method of research. The study is based on
various primary and secondary sources of data collection such as websites of numerous
organizations, books, journals, articles and research papers.

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1.4.1. Mode of Citation

The researcher has followed the citation style as mentioned in the Bluebook 20th Edition.

1.5 Scope & Limitation of Study

The scope of the study of the researcher is to know about different Sources of Finance and it’s
impact on an organisation.

The limitation of the study is that it is more inclined to know impacts of sources of finance on
a business organisation only.

1.6 Tentative Chapterisation

1.6.1 Introduction

1.6.2 Different types of sources of finance

1.6.3 Comparative Analysis of different types of sources of finance

1.6.4 Examples of companies using different sources of financing and

their comparision with each other

1.6.5 Conclusion

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Bibliography:-
Shivam Pradhan, ‘What are the different sources of finance’, geeksforgeeks.org, (November
23),2022, Available at
https://www.geeksforgeeks.org/what-are-the-different-sources-of-finance/ , (Last visited on
January 15, 2023).

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